NS3040 Fall Term 2018 Trade War With China Quoctrung Bui and Neil Irwin, How Much is The Trade War Costing You? $60 for Now, New York Times, July 13, 2018

Introduction Trade war with China ratchetted up on July 10 with imposition of 10% tariffs on another $200 billion of imports from China Massive increase almost doubling earlier tariffs China’s government has sent no indication it will de-escalate trade tensions Could respond just as before with more tariffs on American exports Even harder to see purpose of this new round.

Rationale for Tariffs President Trump’s claim that all of the tariffs are authorized based on an investigation Under Section 301 of the Trade Act of 1974 Based on that inquiry administration concluded China is engaged in unfair trade practices -- including Requirements that American companies engage in joint ventures and forcibly transfer their technology to Chinese firms China’s outright theft and unfair remuneration of intellectual property Cyberespionage and stealing of industrial secrets and Harmful acquisition of American companies and technology through predatory and state-sponsored foreign investment Chad Brown, Trump’s Latest $200 Billion Tariffs on China Threaten a Big blow to American Consumers, PIIE July 13, 2018

Time Line The normal way of handling these complaints would be through The dispute settlement mechanisms of the World Trade Organization Simply negotiating a resolution to these disputes Imposing selective sanctions on particular Chinese firms Trump administration chose threatening and then imposing tariffs July 18 Trump threatened to impose a further $200 billion of imports – beyond $50 billion of June 15, $200 billion of July 10

Composition of Tariffs I Composition of tariffs – July 10 list 23% consumer goods – major change – only 1% of the first $50 billion were consumer goods Rest are intermediate inputs and capital equipment. Shift to consumer goods because fewer supply chain elements left to target Consumer products are most of the imports from China that were left.

Composition of Tariffs II

Composition of Tariffs III

Assessment I New tariffs defy logic Originally Trump administration argued it was to protect US from unfair trade practices Trying to justify products such as Luggage Vacuum cleaners Chair seats and Furniture Are not appropriate under Section 301

Assessment II New rounds of tariffs even larger departure from initial $50 billion round Trump argued original tariffs addressed concerns over unfair trade practices, and industrial policy. Those tariffs were imposed on intermediate inputs and capital equipment -- however Simply resulted in raising costs to American companies Made it more difficult to access parts and components needed to produce competitively in US and compete with foreign companies in global economy Attacked American companies’ involvement in supply chains that run through China hurting American companies and workers supplying their affiliates operating in China Hard to see why administration is now shifting much of the costs of tariff escalation to the American consumer.

August 2, 2018 Developments I Administration has already tariffs on billions of dollars in Chinese imports Now is prepared to consider more than doubling proposed tariffs on a further $200 billion of Chinese goods Increases would be to 25%, up from an original 10%. Administration officials are confident they have the upper hand in the trade fight because U.S. economy is strengthening while the Chinese economy shows signs of growing slack and China is more dependent on trade than the U.S.

August 2, 2018 Developments II The administration didn’t spell out a particular rationale for increasing the tariff. Apparently reasons include To reduce the $376 billion U.S. trade deficit with China by $200 billion, Force China to change its industrial policies, including those that pressure U.S. companies to transfer technology to Chinese businesses. Anger over the Chinese government’s failure to approve the merger of U.S.-based Qualcomm Inc. and Dutch chip maker NXP Semiconductors , which forced the companies to scrap a deal aimed at boosting Qualcomm’s reach into new markets. Compensate for the decline in the value of the yuan by about 6% over the past two months. A weaker Chinese currency makes Chinese products more competitive on world markets.

August 2, 2018 Developments III Critics argue This gets you nothing It adds to inflation pressure and interest rates and would strengthen the dollar, which makes trade situation even worse Businessman: might be able to offset a 10% tariff, but nothing you can do about 25% May encourage China to let the yuan slide even further, raising the prospect that a trade fight turns into a currency battle. President is gambling with other people’s money

August 2, 2018 Developments IV Many lawmakers, economists and industry officials argue The administration’s actions will hurt U.S. families and workers more than they will hurt China -- National Retail Federation. Economists note that the impact of China’s retaliatory tariffs mainly hits Republican strongholds, especially farm states. China buys “about 25% of the entire soybean crop in the United States. Soybean prices are already falling Many Republicans in Congress have talked about legislation aimed at restraining the White House’s trade policies, but so far, no such bill has garnered enough support to pass.